Vines Ltd produces custom machine parts on a job order basis. The company has two direct product cost categories: direct materials and direct labor. In the past, indirect manufacturing costs were allocated to products using a 

single indirect cost pool, allocated based on direct labor hours. The indirect cost rate was $115 per direct labor hour.

 

The managers of Vines Ltd decided to switch from a manual system to software programs that release materials and signal machines when to begin working. Simultaneously, the company adopted an activity-based costing 

system. The manufacturing process has been organized into six activities, each with its own supervisor who is responsible for controlling costs. The following list indicates the activities, cost drivers, and cost allocation rates.

 

Activity

Cost driver

Cost per unit of cost driver

Materials handling

Number of parts

$0.40

Milling

Machine hours

$20.00

Grinding

Number of parts

$0.80

Assembly

Hours spent in assembly

$5.00

Inspection

Number of units produced

$25.00

Shipping

Number of orders shipped

$1500.00

The company's information system automatically collects the necessary data for these six activity areas. The data for two recent jobs follow:

Job order 410

Job order 411

Direct materials cost

$9,700

$59,900

Direct labour cost

$750

$11,250

Number of direct labour hours

25

375

Number of parts

500

2000

Number of machine hours

150

1050

Number of job orders shipped

1

1

Number of units

10

200

Number of hours in assembly

2

30

Required

(a)Suppose the company had not adopted an ABC system. Compute the manufacturing cost per unit for job orders 410 and 411 under the old, conventional costing system.

(b)Under the new ABC system, calculate the manufacturing cost per unit for job orders 410 and 411.

(c)Compare the costs per unit for job orders 410 and 411 as calculated. Explain why the cost per unit under the conventional costing system is different from cost per unit under the ABC system.

(d)Explain why uncertainties may arise about the choice of cost drivers for each activity.

(e)Identify and explain to Vine Ltd's managers the possible advantages and disadvantages of adopting the ABC system.